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South Korea Schedules Restructuring
For Failing Hyundai, Daewoo Units

Government Plan Doesn't Have
Consistent Message, Critics Say

By

Jane L. LeeStaff Reporter of The Wall Street Journal

Updated May 5, 2000 12:01 a.m. ET

SEOUL, South Korea -- Two major financial-restructuring developments in South Korea on Thursday may help stabilize the country's markets, but show the inconsistencies in the government's longer-term reform policies.

Hyundai Group
, South Korea's biggest chaebol, or conglomerate, said its founding family member and group affiliates would pitch in to recapitalize the troubled Hyundai Investment Trust & Securities Co. In addition, state-owned
Korea Development Bank
said it would become the majority shareholder in
Daewoo Securities Co.
, an affiliate of the country's second-largest
Daewoo Group
conglomerate.

In the short term, both moves could help shore up the investment-trust industry, which has been the weak link in South Korea's financial system. The sector's problems were aggravated when the major trusts were caught with the bulk of Daewoo Group's debt. Daewoo nearly defaulted on 89 trillion won ($80.19 billion) of debt last year. Adding to the firm's woes is the bad debt of Seoul Investment Trust Management Co., in which Daewoo Securities has a stake. Analysts say Seoul Investment could receive a capital injection from the KDB. (The KDB says no decision has been made.)

Trust Issues

Moreover, the troubles of the trust firms have damped the stock market and raised fears of another financial crisis. These firms traditionally have been the largest buyers of bonds and were a major force behind South Korea's stock-market boom last year.

In the longer term, however, the developments at Hyundai and Daewoo could hurt Korea's economy because they run contrary to the government's repeated efforts to prevent stronger affiliates from supporting weaker ones in unrelated businesses. For instance, the failure to sell Daewoo Securities to a private entity is a step back from the government's commitment last year to do so.

Some economists worry that these moves suggest the absence of a steady message. "The Korean government has never maintained consistent policy on chaebol reform," said Kim Jong Seok, an economics professor at Hong Ik University in Seoul. He added that while the government is good at daily fine-tuning, it "has no visionary principle -- and that will hurt the economy."

A Capital Idea

Announcing details of its plan, Hyundai Group said Chairman Chung Mong Hun would make an investment to help recapitalize the trust firm using his shares of nonlisted Hyundai affiliates. Hyundai values those shares at 90 billion won. The trust firm also is hoping to raise capital through asset sales, foreign investments, and by listing on the over-the-counter Kosdaq market by the end of 2002.

For further assurance, the group also said Hyundai firms would place their shares of nonlisted Hyundai affiliates, which it values at 1.7 trillion won, with the trust firm. These shares could later be converted into a stake in the firm.

The trust firm needs 1.2 trillion won by the end of the year for recapitalization, Hyundai said. The entire group has been dragged down as shareholders have worried that Hyundai affiliates would be burdened with the trust firm's financial problems.

Meanwhile, the KDB said it would increase its stake in Daewoo Securities to 25% from the current 2.9%, making it the majority shareholder. A bank official said the effort would cost between 170 billion won and 180 billion won. Last year, Daewoo Securities' creditor banks, including the KDB, together bought a 29% stake in the brokerage firm to help increase capital. At the time, they said that they'd sell off the shares, though they didn't set a timetable to do so. But as the sale dragged on, Daewoo Securities' share price plummeted, exacerbating the brokerage firm's difficulties. An official at the Financial Supervisory Commission, an official regulatory body, said the government tried to broker a deal with private institutions, but failed to find a buyer other than the state-owned KDB.